FX Markup

An FX markup (foreign exchange markup) is the gap between a benchmark exchange rate, typically the mid-market rate, and a less favorable rate that a customer is quoted when changing money from one currency into another. It is the price the provider charges for the conversion, built into the rate rather than shown as a separate fee. On an international money transfer, card purchase abroad or business payment in a foreign currency, the FX markup is often the largest component of the total cost, and frequently larger than any visible transfer fee.

The markup is usually expressed as a percentage of the mid-market rate or in basis points. It is related to, but distinct from, the FX spread, which is the gap between a dealer's buying and selling rates.

A payment provider buys currency in the wholesale market at or near interbank rates, often through a bank or liquidity provider. It then quotes customers a less favorable rate. The difference covers the provider's own wholesale spread, the risk that rates move between quotation and settlement, hedging costs, the cost of holding balances in different currencies, and profit. Providers set markups by currency pair, customer segment, transaction size and channel, so the same provider may charge very different markups on a major pair such as EUR/USD and on a thinly traded payment corridor.

Example

Suppose the mid-market rate is 1 US dollar = 83.00 Indian rupees and a provider offers a sender 81.34 rupees per dollar. The markup is (83.00 − 81.34) ÷ 83.00, or 2 percent. On a transfer of USD 1,000, the recipient gets INR 81,340 instead of INR 83,000 at mid-market, a difference of INR 1,660, or about USD 20. If the provider also charges a USD 5 transfer fee, the all-in cost of the transfer is about USD 25, or 2.5 percent, of which the markup accounts for four-fifths.

• Remittances: consumer money transfer providers often advertise low or zero fees while earning most of their revenue from the markup on remittances.
• Bank wires: banks converting outgoing cross-border payments commonly apply a markup to their board rate, in addition to wire fees and charges determined by OUR, SHA and BEN charge codes.
• Card payments: card networks set a conversion rate, and issuers add a foreign transaction fee; merchants or terminals may also offer dynamic currency conversion, which often carries a higher markup.
• Business payments: platforms paying suppliers or receiving export proceeds earn markups on conversion, sometimes negotiated as a fixed spread over a benchmark.

Because markups are embedded in the rate, customers often find them hard to see. Several regimes require disclosure. In the United States, the Dodd-Frank remittance rule, implemented in Regulation E, requires providers to disclose the exchange rate used, fees and the amount the recipient will receive before the consumer pays. In the European Union, the Cross-Border Payments Regulation, as amended in 2019, requires providers to disclose currency conversion charges for card payments and credit transfers as a percentage markup over the latest euro foreign exchange reference rates published by the European Central Bank. Consumer advocates and international bodies have argued that a markup over a clear benchmark, rather than a bare rate, is the most useful single figure for comparison.

The World Bank's Remittance Prices Worldwide database has for years shown the global average cost of sending USD 200 to be around 6 percent, well above the United Nations Sustainable Development Goal target of 3 percent by 2030, with the FX margin a major component. Costs vary widely by corridor, and are typically higher where a currency is subject to capital controls, where the official spot rate differs from the parallel rate, or where few providers compete.

Critics argue that hidden markups mislead consumers, especially when combined with "no fee" marketing. Since the 2010s, specialist providers have competed by charging transparent fees and converting at or near mid-market rates, which has put pressure on banks and traditional money transfer operators. Providers counter that markups compensate for real costs, including the risk of rate movements on floating exchange rates, liquidity costs in exotic currencies and the expense of hedging, and that a single headline fee would raise the price of small transfers.